The life span of one or both share classes is very important and in the event the whole company has a limited life, Russ Mould, investment research director of AJ Bell, says the adviser must be clear on the winding up process.
He says the assets will be sold, any debts paid and the remainder distributed to shareholders, but the order of priority does vary from company to company.
Mr Mould says it is vitally important to know what the pecking order is between the different share classes and ZDPs usually come first at wind-up.
Shares in split capital investment trusts are bought and sold on the London Stock Exchange as they would be for any other publicly-listed entity.
Mr Mould says the value of the shares is then driven partly by the performance of the underlying portfolio but also by the balance between buyers and sellers on the open market.
As with any fund or investment trust, the adviser needs to be sure the split capital investment company’s objectives are suitable for the client and that its asset, geographic or industry exposure suit the client’s needs.
The long-run performance of the portfolio and the share classes is important and Mr Mould says the adviser needs to be confident in the capabilities of the trust manager, too.
He says a fund management house with a good record in splits would be desirable and the adviser should find out what resource is available to the trust manager and what investment processes are in place.
After all, Mr Mould points out the returns from shares in the split capital company are heavily influenced by the performance of the portfolio, which will also determine how much cash there is left to distribute in the event one share class or the whole company is wound up.
He says: “The trust may also have a policy on how it addresses any discount to net asset value and the adviser should ask about the split capital investment company’s board and how it operates, as those executives are there to guard the interests of shareholders.”
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says researching the companies thoroughly includes looking at the portfolio, objectives, charges, manager’s performance record, structure of the split and whether it has bank debt (financial gearing).
She says: “Advisers should ask about the split structure and ensure they fully understand how it works.
“There are special split capital performance measures which are available on the AIC’s site.”
For more information on these see the AIC’s online seminar on split capital investment companies.
